Free markets suppose to compress margins, perfect market theoretically drive profits down to zero (aka involution). But you compress margin and you lose current western semi business model that is functionally monopoly suppliers/producers who can sustain 50%+ margins to keep their monopoly. Shed those margins down to 20% because competitor enters market, harder to fund R&D to keep lead, it's still "enough" to be profitable, but then western commercial companies have to think harder how to split that compressed margin between investors and R&D. Right now we know what this leads to. Investors get paid, companies beg for subsidies. Not that PRC companies aren't concerned, look at PRC stock capitlization, not nearly to the same degree.
Free markets? No, competition does that. Competition requires free markets but free markets don't guarantee competition.
I poorly paraphrased profits converge to zero under perfect competitive market. Yes real world not perfect competitive markets. Oligor/duo/monopolies form, sometimes subsidies other shenanigans pick winner(s), winners extract huge margins/rents to build moats lock out new competition. Sometimes they collude / settle on business model with higher margins, i.e. 10-20% being normal/commodity, 50% for software and semi is top end of luxury goods. New state backed competitor enters and decides they can live on 10% margin, and then incumbants business model falls apart unless state also steps in to match.
E: And state can, but I don't know if state generally willing/able to backstop companies to 50% margin long term. I can't think of any, maybe some major state oil. Nvidia/TSMC with $$$ margins getting some CHIPs injection really meant for bailing out broke ass Intel was already anomalous, and it was basically to bribe them to onshore production.
Note "converging to zero" doesn't really mean zero because economics includes opportunity costs. It just means that outsized gains don't exist over the longer term without some kind of market power. In the long run, most industries end up making the same returns.
I've found that this does not match reality. People have strong beliefs in value of specific things, even when that value is not economically there. The value of software is indeed zero, which seems to make people value hiring software engineers greatly over paying for software, and, tbh, that makes approximately zero sense in a lot of cases. The value of medical care is high, even when it's not (meaning there is plenty of medical and "medical" products that don't have real value). The value of houses is high and absolutely certain. Thinks like certain brands (even when the company behind them has disappeared), most obviously of watches.
This tends towards the economic reality but it certainly does not match it.